1. Field of the Invention
The invention relates generally to financial investing. The invention relates more specifically to stock market hedge strategies.
2. Description of Prior Art
Investing in stocks, securities, and other types of financial instruments can protect assets and produce gains. Yet such investing carries an accompanying risk of loss. One method of minimizing the risk of loss is by hedging. Hedging is an investment strategy designed to reduce investment risk by taking an offsetting position through the use of financial instruments such as options, short sales or futures contracts.
A particular hedging technique relating to stocks is called a long-short equity strategy, which entails having a portfolio of both long positions and short positions in stocks. In a long-short equity portfolio, the long positions can have different market correlations, industry exposures and/or money weighting than the short positions. A particular type of long-short equity strategy is called market-neutral, which entails having long positions that equally offset the short positions with regard to market correlations, industry exposures and money weighting. The offsetting characteristics of a market-neutral equity strategy strive toward reducing market risk to close to zero. Even though market risk is almost eliminated, successful market-neutral equity strategies, as with all investment strategies, require the proper selection of securities in order to achieve positive investment returns.
There are many web-based organizations involved in providing stock market investment advice to individuals. These organizations can be divided into six main groups: (1) stock message boards, (2) portfolio ranking and presentation providers, (3) packaged portfolio investment providers, (4) research analyst performance trackers, (5) investment advice websites and newsletters, and (6) investment research report repositories.
Stock messages boards are comprised of websites which provide discussion forums for individual stocks. For each individual stock, a message board exists to which members post qualitative, free-form commentary regarding the company's prospects. Some message boards additionally have the feature of capturing more structured data regarding the member's sentiment, whereby the member can indicate a particular investment recommendation such as: strong buy, buy, hold, sell, or strong sell. Examples of businesses in the stock message board space are Yahoo! Finance (finance.yahoo.com), Motley Fool (fool.com), CBS MarketWatch (cbs.marketwatch.com), ClearStation (clearstation.etrade.com), Raging Bull (ragingbull.com), and BoardCentral (boardcentral.com).
Portfolio ranking and presentation providers are comprised of websites which provide a facility for members to maintain a hypothetical portfolio of stocks which is then shared with other members of a website. Actual stock prices are used to compute the theoretical returns of the portfolios on a daily basis. The top performing portfolios are ranked and presented for other members to review. An example of a business in this space is ClearStation (clearstation.etrade.com).
Packaged portfolio investment providers are comprised of websites which offer to individual investors the opportunity to invest in proprietary portfolios of stocks. Some of the portfolios are baskets of stocks which are manually constructed by the investment provider and focus on a variety of investment areas. Some of the portfolios are baskets of stocks that are systematically constructed based upon stock screening algorithms, one of which includes the analysis of investment recommendations from top research analysts in the industry. An example of a business in this space is FOLIOfn (foliofn.com).
Research analyst performance trackers are comprised of websites which track the performance of research analysts by measuring the accuracy of earnings estimates and evaluating the investment returns of stock recommendations using actual stock prices. Some websites construct hypothetical portfolios using a weighted average measure based upon analyst recommendations. Examples of businesses in this space are StarMine (starmine.com) and Investars (investars.com).
Investment advice websites and newsletters are comprised of many websites which provide stock market investment advice and investing techniques as well as specific stock recommendations based upon technical or fundamental analyses. In many cases the information is delivered to members in a newsletter on a subscription basis. Examples of businesses in this space are Zacks Investment Research (zacks.com), Forbes (forbes.com), The Street.com (thestreet.com), Motley Fool (fool.com), CBS MarketWatch (cbs.marketwatch.com), ValuEngine (valuengine.com), and Penny Share Advisor (pennyshareadvisor.com).
Investment research report repositories are comprised of websites which provide a repository of research reports available for sale to individuals in the investment community. Some of the websites are themselves the providers of the investment research, while other websites are aggregators of investment research provided by other parties. Research reports are available for individual stocks as well as for particular industries. Examples of businesses in this space are Standard and Poor's (standardandpoors.com), Morningstar (morningstar.com), Zacks Investment Research (zacks.com), Reuters (reuters.com), and Yahoo! Finance (finance.yahoo.com).
There are also a number of patent documents disclosing methods and systems that attempt to improve investments in financial vehicles and to minimize risks.
International Application WO0171526 “System For Ranking Financial Underwriters” (Henley Sep. 27, 2001) discloses a system for ranking individuals or firms who advise and offer predictions on capital markets. The system collects data on the underwriter's past predictions, compares the underwriter predictions with actual performance, and compares several underwriters for rating the underwriters. An underwriter's rating is used to determine future performance.
United States Patent Application 20010042037 “Internet-Based System For Identification, Measurement And Ranking Of Investment Portfolio Management, And Operation Of A Fund Supermarket, Including ‘Best Investor’ Managed Funds” (Kam et al. Nov. 15, 2001) discloses a system and method for determining the “best investors” in a group of investors. Virtual, performance-based, investment competitions are held that provide portfolios to investors, allow investors to trade, track trades, and rank the performance of investors. The system includes a performance ranking system for advisors in the system.
U.S. Pat. No. 6,338,047 “Method And System For Investing In A Group Of Investments That Are Selected Based On The Aggregated, Individual Preference Of Plural Investors” (Wallman Jan. 8, 2002) discloses investors interacting to dynamically manage a mutual fund reflecting the aggregate preferences of many people. Holdings and weightings change dynamically with the people's preferences.
U.S. Pat. No. 6,681,211 “Security Analyst Estimates Performance Viewing System And Method” (Gatto Jan. 20, 2004) discloses a system and method for analyzing a broker's past performance in recommending investments. Predictions may be weighted in order to produce a composite prediction. This system and method focuses on analyzing past predictions of security analysts to make improved predictions.
United States Patent Application 20040133497 “System And Methods For Determining Performance-Weighted Consensus” (Spear Jul. 8, 2004) discloses a system and method for predicting the performance of an investment vehicle using the past performance of the source of advice, i.e. the financial advisor. This system and method comprises a means for collecting data on past recommendations from financial advisors, calculating the performance of the recommendations, ranking the advisors in a “uniform relative performance scale,” and ranking the current stock recommendations of the advisors to determine which stocks will most likely outperform the market. While disclosing a consensus reporting system, the consensus is taken from among expert analysts to rank investment recommendations.
The prior art patent documents and websites generally focus on providing investment advice through either a) unstructured mechanisms for capturing and presenting investment forecasts from individuals in the investment community, or b) data manipulations of the published forecasts from professional research analysts in the investment industry. The prior art generally provides unhedged investment advice that is exposed to market risks, without focusing on the importance of employing hedge strategies which can mitigate such risks. Therefore, an investment forecasting approach is needed which incorporates three key concepts: 1) individuals in the investment community are the ones who impart the actual supply and demand forces in the market that drive future prices, 2) a robust mechanism is required to systematically gather input from individuals in a structured manner and then aggregate and process that collective input into investment forecasts, and 3) a method for neutralizing market risk through hedging is an essential aspect of investing. The result of successfully integrating these three key concepts is a system and method for recording, generating and presenting hedge strategy stock market forecasts based upon the collective input of individuals in the investment community.